Question about US taxes and clients

My advice is to start by going to the IRS site and reading up on self employed business taxes.

1099 or not - if you earn money you pay taxes

As for deductions - there are a lot you can take but get the info from the IRS sites and a tax person. There are also some decent books on tax and small business.

Legal advice, medical advice and tax advice can't be trusted on forums.

Any legitimate business expense can be written off. The key word is "legitimate".

My best advice, though it isn't professional, is to keep track of everything and assume nothing.

All the best,
Michael

Question...

How in the world are you going to believe anybody on this forum or trust their judgement regarding the answers to your questions.

Your post could lead to as much confusion as it could to the right answer, although I'm sure someone here will tell you THEY will give you the right answer.

After all, what have THEY got to lose...

~Bill

Thank you for the great responses. I did look at the IRS site, but it was really confusing and to me it seems like they talk in circles. I understand that legitimate expenses are tax right offs, but I wasn't sure how the whole outsourcing thing was.

For instance, if I pay someone $150 to do something for me, can I claim that as a business expense, and would I have to send the IRS a 1099. Just general questions, since I know there are many people that outsource. I assumed the gurus would be able to tell me their experience.

And I'm fully aware and prepared to pay taxes on all of my income, but I wasn't sure how I would claim taxes with a multitude of clients - I am a writer - since I have several. I just wanted to be prepared so I wasn't spending all of the money I was making. I was looking for a quick response and general information.

Basically I was wondering what other people's personal experience was.

Thank you Jenny, I thought it was closer to 40%, so I'm glad I only used that cash to pay for business expenses. The rest is still in the account.. Many people just assume the 20% and forget the other taxes. The good news is I'm pretty sure the tax consultant fees will be deductible as well

Thanks again!

Best thing for you to do at the moment is go to a local office of H&R Block. They are they only national tax preparation service that is open after April 15. (It's also who I work for as a tax professional for during tax season.) Explain your situation - you are looking for information about getting ready for next years taxes. Don't worry about money. Answers to questions and advice are always supposed to be free.

In the meantime here's the really short answers:

1. Yes you can claim work you outsource. You only need a W-9 for their tax ID. And, you only need this if you need to issue a 1099MISC to them because you paid them over $400 as an independent contractor.

2. You don't claim taxes on your work. You claim the income. It does not matter what paperwork you give them or they give you. If they pay you - you claim the income.

3. Having an EIN, or not, makes no difference. What makes a difference is if you operate your business as a sole proprietor or not. If you are a sole proprietor, your business income is figured on a Schedule C. This is part of your personal income tax return. If you have a partnership or corporation, then it's different.

4. At this time, self-employment tax is 15.3% (half of which is a deduction on your 1040). This is in addition to the regular income tax you will pay on the net profit of your business. The latter amount will vary depending on your tax bracket. It is usually safe to hold about 30% (total) back for taxes, plus enough to cover state tax - if any. You will want to increase that amount another 10% if you are making lots of money. You should also be paying estimated taxes each quarter to avoid penalties at tax time.

Once again, this is only the short answers. For more details, and to ask a bunch of follow-up questions, you do need to talk to someone face-to-face.

Dan

Thanks again for the great advice! I am glad for all the great answers!
Dan - I didn't even know H&R Block was open after April, I'll have to find my local office and ask them some questions. I was considering paying quarterly, but not sure if I'm even going to make much money this year. I just don't want to mess up with my husband's and mine taxes at the end of the year. I just hit the $600 threshold, so now I know I have to claim.

Well, I'm off to print all of my receipts and label everything accordingly. Thanks again for the input!

First, as others have said - you need to talk with a CPA. Even the IRS will state they can not be bound by what they tell you(*) - but a CPA you pay can definitely go to bat for you.

Tax evasion (under reporting income and over reporting deductions) is illegal. Tax avoidance is not. I basically deduct everything and then go over them with my accountant at the end of the year.

The IRS can disallow a deduction - and then hit you with a bill for additional taxes, a penalty and interest - but typically that's only if they find against you. Typically an audit (and I've been through 3 of these types) is against a specific area of your return. Working with your CPA you just typically send them the information/evidence, your version of why you think this is correct, and anything else they ask for. Do NOT send them all your information - a typical audit is not a full audit of your return (those do happen and are a major pain from what folks tell me, usually because they can go over every single line of your return asking for evidence etc.) so you only need to give them exactly what they ask for - no sense in giving them enough rope to confuse the issue and hang you. Sometimes it can be handled by mail/fax/email etc - and sometimes it requires an in person interview.


I have just a sole proprietorship so all my extra income/deductions go on Schedule C. If you have a corporation, llc, or partnership other forms need to be filled out and any items necessary will flow into your personal return. So I need to pay the additional FICA/Medicare tax that an employer typically pays if you are working on a W2. But, you do get a deduction for that extra payment - so for federal purposes you pay more, but no where near 40%. How much it is now I don't remember - that's why I pay a CPA to do my returns. He's worth every penny too - been using the same person for 16 years.

Your CPA will know what to do and how to record/report any payments etc. But if things do not get changed in the recent health care bill - we all might be writing additional 1099's next year. Just make sure your CPA is up todate on these types of issues. And its worth to pay for an hour of his/her time every once in a while so you can be certain you're doing the right things.

good luck!
--Jack

(*) At first I thought this was a cop-out by the IRS - but my CPA explained that they irs agents manning the phones really don't have time to go through your situation so there may be something you forget to tell them - or that happens after you talk with them but before you file - that can change the advice they give you. So they don't want to be held accountable in that situation. Which I totally understand, given the complexity of our tax code.

PS - this is a great thread for folks - please let keep on topic and not use this as an excuse to go off on tangents and get the thread deleted. Thanks.

Jack- I actually just got audited on my NC taxes for 2007. They found two errors and I had my return done by someone else. I was able to validate one error by sending the supporting docs, however the second error was wrong and I ended up paying. Luckily it was an inexpensive mistake. They just cashed my check which is why I thought I'd ask a few questions.

I have read the IRS website and it does get confusing. I really do understand the concept of itemization and what is considered deductible and what isn't. I've looked over the items for starting a home business and office products, etc. I am keeping my receipts for all these items.

What I was really unsure of was how to keep track of the clients and outsourced work. I was writing for several websites and completed the W9 for those, so I know they will file the 1099 at the end of the year, so no problems there. But I also have private clients that I completed work for. I was going to just show my account to use as docs for my income. I know about how the in a "regular" job the employer pays half of the medicare and social security taxes, however home business must pay the entire amount. People really focus on this but no one goes on to say if that included federal and state taxes. I didn't think it did, and I wanted to see what others had actually experienced. I'm pretty sure I was correct in assuming that it did not.

I also was wondering if I was able to claim the outsourcing work that I paid for as a deduction if I did not receive a W9 for the provider. It seems that I can. When I have actually received an income I will go see a CPA (Thank you I couldn't remember what it was called). Right now I would actually pay more in fees than paying out in taxes.

These are just some questions I've had floating around my head and wanted to see what others had experienced. I am by no means trying to fraud the gov't. Honestly I can't wait for the day when I no longer get a tax return. That must mean that my income has far exceeded my expectations! Until then , I don't want to spend the money I'm making and then owe at the end of the year and get into a financial bind.

Thank you again for the advice. I just wanted a quick heads up, maybe from people who lived and learned... I would much rather have money left at the end of the year after I pay the taxes then to have to come up with the money to pay!

Nickel,
I've hired several contractors to either write for me or do programming/system administrative work. I simply have a category on my schedule C called contractors where I record the information. I've never sent a 1099 - since these folks were hired as businesses themselves. They invoiced me, I sent a check. I kept a copy of the invoice and check register as proof I paid them.

Receipts - email or physical - I keep for other items too - like hosting services and my autoresponder. I just deduct their costs from my proceeds of my writing/ebooks/etc. If there's a profit - I pay tax. If there's a loss - depending on the amount - I can deduct some of it from my W2 paychecks. Anything left over is carried over to next year to offset income then.

Trying to do this on your own is going to make you crazy - its time IMHO better spent on expanding your business. Pay the bookkeeper or CPA and be done with it.

on a Side note - where in NC are your located? I'm near Raleigh and there are several great marketers in the area.

best,
--Jack

Thanks jacktacket for the info. I have been keeping all of my receipts, and I do plan on seeing a CPA towards the end of the year.

Thanks for the input. I've outsourced some work and didn't do any paperwork, I only have the receipt from PayPal. I was hoping I didn't goof and was still able to deduct that. It seems that I am.

I'm actually in New Bern right now. I didn't even realize there were many marketers in NC. It's great to hear I'm not the only one. I was disappointed when I found out Amazon isn't open to NC residents. I was hoping to build my own store on one of my websites, but it's not to be... Too many taxes in this state, or so I've heard :-) Although I know many many people who are still waiting on their state tax return. I heard that they don't have enough funds to cover the checks. Guess I'll never get mine. I didn't file to March! :O